Economy
Mint Primer: How India’s trade gap soared, and how it might hurt
Summary
- Widening trade deficit puts pressure on the current account balance. Rising imports have increased demand for dollars, weakening the local currency.
India’s gold imports jumped fourfold to nearly $15 billion in November, powering a 27% surge in goods imports. At the same time, exports fell 4.9%. The result: A record trade deficit of $37.84 billion. Mint examines the implications.
What led to the record trade deficit in November?
India’s imports in November soared to $69.95 billion, sharply up from $54.48 billion in November 2023. Merchandise exports, on the other hand, declined to $32.11 billion from $33.90 billion in the same period. Prominent drivers of the trade deficit were higher gold imports and falling realizations from petroleum exports. Gold imports touched $14.86 billion, a fourfold increase from $3.44 billion in November 2023, driven by higher volumes, likely fuelled by festive and wedding season demand. A sharp decline in the export realization of petroleum products added to the trade deficit.
Is the manufacturing sector slowing down?
The decline in goods exports could suggest challenges in India’s manufacturing sector, particularly since exports are becoming increasingly imported components and raw materials. Production-linked incentives and the introduction of quality control orders to reduce import dependency are yet to show significant results. Small enterprises making components are finding operations sustainable, given the higher logistics and production costs, and those components are being imported. This indicates the need for a stronger domestic manufacturing base to compete globally.
What are the challenges from high trade deficit?
Widening trade deficit puts pressure on the current account balance. Rising imports have increased demand for dollars, weakening the local currency. The rupee has fallen sharply in November and December, compelling the RBI to intervene to contain volatility. If imports continue to rise, it will have a direct impact on India’s forex reserves.
Read more: India in 2025: Challenges are resurfacing but so are opportunities
Is there room for optimism?
The government remains optimistic about achieving $800 billion in total exports (merchandise and services) in FY25. While current challenges persist, growing non-oil exports and improving domestic demand are positive indicators. The WTO’s outlook for a moderate expansion in global trade through 2024-25 also provides hope for a rebound. Experts expect gold imports to normalize in the coming months. The rise in non-petroleum exports, which grew by 7.4% in November, is a sign of resilience.
What about services exports?
While merchandise exports struggled, services exports have continued to perform strongly, with November’s surplus reaching a record $18 billion. Services exports grew to $35.67 billion, outpacing merchandise exports in November. The services sector has clocked a compounded annual growth rate of 10.5% between FY19 and FY24. At this pace, services exports are projected to surpass merchandise exports by FY30, driven by sectors like management consulting, legal services and engineering.
